Continuing Conflict Mineral Confusion

I know I’m late to the party on this David Aronson/Dodd-Frankkerfuffle, but I have to say that I’m still really baffled by some of the arguments being tossed around.

First of all, as I’ve said in the past, I’m not at all clear on what the legislation is actually supposed to do. I get that the short answer is “provide transparency in the mineral supply chain in the DRC.” And that sure does sound like a nice thing to have. But then what? It seems like the theory is that once the transparency is created, no one will buy minerals from mines that are under the control of armed groups, which will cut off mining revenue as a means and motivation to continue the conflict, and hasten said conflict’s end. But even assuming that the factual assumptions underlying that logic are correct (e.g. that minerals are fueling the conflict, and that cutting mineral revenue would end it), it seems to me that it’s a fairly brutal method of conflict-ending, no? People work in those mines. They rely on them for survival. Is there a scenario in which shutting them down does not have a devastating effect on extremely vulnerable people? (The same people, in fact, that this whole shebang is supposed to be helping in the first place?) Should we take the same attitude towards all other economic activity that is “taxed” by armed groups? Or is this policy mechanism limited to economic activity that’s linked to hipster toys like iPhones?

Second of all, I don’t understand advocates’ insistence, in response to criticism like Aronson’s, that “[t]he Dodd-Frank legislation in no way mandates or supports a real or de facto embargo on minerals exports from eastern Congo.” (That’s from Jason Stearns, who I’m quoting because he stated it so clearly, but he’s by no means alone in such thoughts.) I understand that the law doesn’t specifically mandate a ban. But a law’s specific provisions, and its effect on actual behavior, are never the same thing – and there was no reason to expect that they would be in this case. For one thing, if Dodd-Frank is not meant to have a de facto embargo effect on conflict minerals, along the lines of what I outlined in the paragraph above, then what is it supposed to do?

And moreover, how could it not have such an effect? Minerals are commodities. They are priced as commodities. Congolese-sourced “three Ts” are not, to my knowledge, boutique luxury items that command a premium in the marketplace because of their exotic sourcing. So, when Dodd-Frank raises their cost – both directly, by imposing the costs of making the supply chain transparent, and indirectly, due to the risk of massive securities-law penalties if the transparency isn’t handled correctly – that makes them a much less attractive product than minerals from elsewhere that come with no such costs.

A hypothetical example, to illustrate my point:

Tantalum dealer: Welcome to Crazy Bob’s House of Tantalum! What can I do you for today?

Electronics manufacturer: I would like to buy some tantalum, please.

Tantalum dealer: You’re in luck! Today you have two tantalum options. House Blend Tantalum for $100 per pound, or Premium Great Lakes Tantalum for $110 per pound.*

Electronics manufacturer: What is the difference between them?

Tantalum dealer: There isn’t one! They are exactly alike in purity, quality, and all other substantive attributes. However, the “Premium” variety costs more up front, because we have to spend a lot of money to ensure the transparency of the supply chain in order to comply with U.S. securities laws.

Electronics manufacturer: I’m sorry, what was that about “securities laws”?

Tantalum dealer: Oh, did I forget to mention that? If we didn’t do a good job clearing up the supply chain, your company will be on the hook for a massive, costly SEC investigation and fines. So, how much do you want to order?

Electronics manufacturer: So, let me get this straight: my options are regular tantalum that does not cost extra and does not carry a risk of major regulatory investigation, or tantalum that is in no way better but costs extra and does come with all that risk?

Tantalum Dealer: Correctamundo!

Electronics manufacturer: 10 pounds of House Blend please. And maybe you can just put a note in my file that I am never, ever, under any circumstances, to be sold the other stuff? I’m not touching that Great Lakes stuff with a ten-foot pole.

Tantalum Dealer: But where is your commitment to buying from this region? Why don’t you care about Africans?

Electronics manufacturer: I have a commitment to my shareholders to not incur unnecessary costs or risks. It’s too bad about Africa, but don’t worry – I’ll send a donation to Bono to make up for it.

And I’m not even going to bother getting into the whole “illicit armed groups have an advantage in the illicit trade that is likely to result” issue, because that’s hardly news. *Cough* war on drugs *cough* also basically every other illicit trade ever *cough cough cough.*

So, to sum up: I understand why transparency would be nice. And I’m certainly all in favor of conflict ending, rule of law being established, and all that good stuff. But I’m not at all convinced that Dodd-Frank, as a means towards those ends, will do more good than harm.

There's often a big difference between a market price and the extraction price of a commodity. This is the reason why Saudi Arabia (very cheaply extractable oil) is very rich – they can sell the stuff for far more than it costs them to extract, and why Canada's tar sands (expensive to extract oil not worth extracting until price is high) have only recently been exploited.

In DRC a lot of the minerals are very cheap to extract, in terms of actual mining cost. So even though a purchaser might pay less for them with Dodd-Frank in operation, given the extra due diligence costs they incur, they – and the miners – could still potentially make a good profit out of them. But it requires a tracability chain to be established to be able to do that.

I'm no expert on the specifics of this, and everything I've read does seem to point to a classic outcome for the law of unintended consequences. But I do think there is a wider picture that rarely seems to get discussed. That is whether the Dodd-Frank act can be seen as part of a general evolution towards a blanket deterrence for sourcing stuff we need from dodgy warlords. The cat escaped from the bag a long time ago in Eastern Congo. But if the next would-be warlord out there realised that grabbing control some of well of riches would not in fact yield him any riches due to market ostracism, then maybe we'd be starting to get somewhere.

It's the same basic argument as to why the ICC should indight current troublemakers such as Bashir, even if that makes the current peace process harder; if you don't start somewhere then you'll never succeed (i.e. ICC would have no credible deterrent effect). Now it certainly is arguable as to whether Dodd-Frank is the best start or even a good start, but given the imperfections in the legislative process, I can imagine worse ways. Not that I imagine this will be much consolation for miners in E Congo who are now without a job.

The thugs, warloads and strong-men that run east Congo will not give up thier guns because of a transparancy requirment in US financial regulation. Nor will turning off your cell-phone for an hour in October http://www.congoweek.org/the-cell-out.html have any effect.

Power, be it legal or illegal, allows the 'taxation' of people. In the case of east Congo, that power is illegitimate (without the consent of the governed) and the methods of enforcing or collecting the tax are reprehensible. Ok. But if the bad guys dont tax the minerals they will tax the cevassa, or smuggle, or export via fraud. What they wont do is give up thier guns and leave.